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Dynamic Pricing and Investment from Static Proxy Models

Author

Listed:
  • Mandy David M.

    () (University of Missouri)

  • Sharkey William W.

    (Federal Communications Commission, Washington, D.C.)

Abstract

This paper evaluates the use of static cost proxy models in setting forward-looking prices such as the prices set according to the FCC's TELRIC methodology. First, it compares the time paths of prices and depreciation under traditional regulatory accounting with the prices and depreciation implied by various versions of TELRIC. When TELRIC prices are recomputed at intervals shorter than asset lives, the firm will generally not earn the target rate of return. In these cases, a correction factor must be applied to the TELRIC price path in order for revenues to exactly recover investment cost, including the target rate of return. Next, the paper considers a firm's cost minimizing investment decisions under two different assumptions about asset obsolescence. In both scenarios, cost minimizing investment paths and implied utilization rates for the firm's assets are derived under a variety of assumptions about the relevant input parameters. Some implications for TELRIC pricing are then derived.

Suggested Citation

  • Mandy David M. & Sharkey William W., 2003. "Dynamic Pricing and Investment from Static Proxy Models," Review of Network Economics, De Gruyter, vol. 2(4), pages 1-37, December.
  • Handle: RePEc:bpj:rneart:v:2:y:2003:i:4:n:7
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    Citations

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    Cited by:

    1. Dominik Schober, 2013. "Refinancing under Yardstick Regulation with Investment Cycles–The Case of Long-Lived Electricity Network Assets," EWL Working Papers 1321, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Jun 2013.
    2. Lewis Evans & Graeme Guthrie, 2006. "Incentive Regulation of Prices When Costs are Sunk," Journal of Regulatory Economics, Springer, vol. 29(3), pages 239-264, May.
    3. David E. M Sappington, 2005. "On the Irrelevance of Input Prices for Make-or-Buy Decisions," American Economic Review, American Economic Association, vol. 95(5), pages 1631-1638, December.
    4. Henry Ergas, 2009. "Error and Design: Economics in (and some Economics of) the Australian Competition Tribunal," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 16(3), pages 71-94.
    5. T. Randolph Beard & Jeffrey Thomas Macher & Chris Vickers, 2016. "This Time is Different (?): Telecommunications Unbundling and Lessons for Railroad Regulation," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 49(2), pages 289-310, September.
    6. Evans, Lewis T. & Guthrie, Graeme A., 2005. "Risk, price regulation, and irreversible investment," International Journal of Industrial Organization, Elsevier, vol. 23(1-2), pages 109-128, February.
    7. Rogerson William P, 2011. "On the Relationship Between Historic Cost, Forward Looking Cost and Long Run Marginal Cost," Review of Network Economics, De Gruyter, vol. 10(2), pages 1-31, June.
    8. Neumann, Karl-Heinz & Vogelsang, Ingo, 2013. "How to price the unbundled local loop in the transition from copper to fiber access networks?," Telecommunications Policy, Elsevier, vol. 37(10), pages 893-909.
    9. Martyn Taylor, 2010. "Access Regulation versus Infrastructure Investment: Important Lessons from Australia," Chapters,in: Regulation and the Evolution of the Global Telecommunications Industry, chapter 3 Edward Elgar Publishing.
    10. Kenneth Fjell & Øystein Foros & Debashis Pal, 2010. "Endogenous Average Cost Based Access Pricing," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 36(2), pages 149-162, March.
    11. Pio Baake & Brigitte Preißl (Eds.). Johannes M. Bauer & Per Björstedt & Elena Gallo & Anders Henten & Sven Lindmark & Martijn Poel & Enzo Pontarollo & Knud Erik Skouby & Jason Whalley, 2006. "Local Loop Unbundling and Bitstream Access: Regulatory Practice in Europe and the U.S," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 20, number pbk20, November.
    12. Bauer, Johannes M., 2005. "Unbundling Policy in the United States Players, Outcomes and Effects," MPRA Paper 2455, University Library of Munich, Germany.
    13. Blum, Ulrich & Growitsch, Christian & Krap, Niels, 2006. "Network Investment and the Threat of Regulation – Preventing Monopoly Exploitation or Infrastructure Construction?," IWH Discussion Papers 7/2006, Halle Institute for Economic Research (IWH).
    14. Hoernig, Steffen & Jay, Stephan & Neumann, Karl-Heinz & Peitz, Martin & Plückebaum, Thomas & Vogelsang, Ingo, 2012. "The impact of different fibre access network technologies on cost, competition and welfare," Telecommunications Policy, Elsevier, vol. 36(2), pages 96-112.
    15. de Braganca, Gabriel Fiuza & Rocha, Katia & Moreira, Rafael Henrique Rodrigues, 2008. "Real Options and the Regulation of Brazilian Fixed-Line Telephone Operators: The Mark-up on the Cost of Capital," Working Paper Series 3997, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    16. Timothy Tardiff, 2015. "Prices based on current cost or historical cost: How different are they?," Journal of Regulatory Economics, Springer, vol. 47(2), pages 201-217, April.
    17. Ingo Vogelsang, 2012. "Incentive Regulation, Investments and Technological Change," Chapters,in: Regulation and the Performance of Communication and Information Networks, chapter 4 Edward Elgar Publishing.
    18. Gabriel Godofredo Fiuza de Bragança, 2005. "A Remuneração de Redes nas Telecomunicações e a Nova Orientação a Custos: Avaliação e Perspectivas Para a Telefonia Fixa Brasileira," Discussion Papers 1104, Instituto de Pesquisa Econômica Aplicada - IPEA.
    19. Guthrie, Graeme, 2006. "Regulating Infrastructure: The Impact on Risk and Investment," Working Paper Series 3851, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
    20. Schober, Dominik & Weber, Christoph, 2015. "Refinancing under yardstick regulation with investment cycles: The case of long-lived electricity network assets," ZEW Discussion Papers 15-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    21. Guthrie, Graeme & Small, John & Wright, Julian, 2006. "Pricing access: Forward-looking versus backward-looking cost rules," European Economic Review, Elsevier, vol. 50(7), pages 1767-1789, October.
    22. Sappington, David E.M., 2006. "On the design of input prices: Can TELRIC prices ever be optimal?," Information Economics and Policy, Elsevier, vol. 18(2), pages 197-215, June.

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